Hey guys! Today Matt from DistilledDollar.com is telling you why student loans can be a good thing. Sounds crazy, but just read on (it's good). ~M$M
According to this 2015 interactive state by state map, the average student loan debt in Illinois (where my girlfriend and I currently reside) was $28,984. That means that, between the two of us, we are above average by 209%.
…At least we’re above average in something? ¯\_(ツ)_/¯
The reason I added in the awkward shrugging smile is because student loan debt has become a kind of right of passage for millennials, and — contrary to what most of us believe — having student loan debt actually helps us in many ways.
By adopting this perspective, we can diminish the stress surrounding our loans and can instead be grateful and happy that our loans have equipped us with extra knowledge and willpower in the financial game of life.
But even still — all optimism aside — let’s face it: student loans suck.
I see friends of mine who have never had to budget or think about what refinancing a loan might do to their credit. They’re able to live in a carefree world and sleep soundly at night, never laying awake and wondering how they’re going to afford their credit card bill after those automatic deductions hit the checking account.
That carefree world might be a nice place to live, but I would never want to trade places with such people because I’ve seen first hand the kind of destructive financial habits they develop. Far too many of my friends graduated debt free, only to accumulate five digit credit card debt.
We’ve heard it before, “no pain, go gain.” This concept holds true with student loan debt. Only once we have experienced enough struggle in a specific area of our lives, do we feel a need, even an urge, to change and improve.
Of course, debt isn’t necessary in order to develop better financial planning habits, but it often provides that initial spark, or “kick-in-the-ass” to get started.
Prime example: If it wasn’t for student loan debt, I would never have picked up a personal finance book.
That is precisely why I think there is an overlooked and underrated silver lining to student loans.
Here are some life and money lessons I wouldn’t have otherwise learned:
1) Appreciating Every Dollar
When I was going through college the amount of debt I racked up seemed insurmountable. As I studied for finals, I didn’t think much about buying a $25 sushi dinner or grabbing a $4 drink at Starbucks. Each of these expenses was so small compared to the enormous pile of debt waiting for me.
Since graduating, I’ve started to earn real money and I began to appreciate how much each dollar is worth. I measure the value based on how much time it takes me to earn each dollar. I have drawn the link between the time I spend at my day job and how much of that time is being used to pay down debt.
It is almost a crippling realization of how much time is spent paying back debt, but it brings us closer to the truth. From here, we’re left with a clear perspective on how we can improve our life.
2) Developing a Long Term Plan
With over 115k in combined student loan debt, my girlfriend and I know it will take many years to pay it all off.
If you’re single, then the same principles apply, although you might not have someone who wants to day-dream with you.
Again, it is a sad realization, but on the bright side, we have fun planning things out in our future. We’ve talked about when would be the right time to buy a house, for example, or when we can take a dream vacation to France to drink all the wine and eat all the cheese.
We’re basically planning out our rewards and enjoy talking about which wine country we will visit. It might be a bit of daydreaming, but it makes us happy and brings us closer together.
We have an honest picture of what our future will look like.
3) Solidifying Strong Money Habits Early
I would argue the best part of student loans is that we become conditioned over time to pay a large chunk of our salary back into our net worth. Sure, this money is used to pay down our liabilities, but over time, our net worth continues to grow.
If we didn’t have student loans then chances are we would be spending this money on living a slightly nicer lifestyle.
As mentioned above, I’ve seen some of my closest friends think their incomes were endless and that they could rack up credit card debt with the hopes of paying it off with a future salary increase or a year end bonus. The problem with this type of thinking is that once you get accustomed to “spending today and paying it off tomorrow”, it is a very difficult habit to break.
It is always easier to increase our lifestyles in the future than it is to cut and eliminate expenses that we have become accustomed to.
As a reader of Bobby’s great site, you’re no doubt looking for ways to eliminate and destroy your debt. I hope this post empowers you to feel more confident regarding your financial situation and helps you to alleviate the stress of trying to keep up with your debt-free peers.
Matt from the Distilled Dollar is a CPA helping people to extract the vital aspects of personal finance as they pursue financial independence. His post outlines three of his key takeaways he’s had while managing student loan debt. You can check out his site for more articles or follow him on Twitter @DistilledDollar.
I’m always a bit hesitant to comment on student loan stories, since I managed to graduate undergrad and grad school without them (privilege, hard work, and luck were all factors). But I think that there are lessons to be learned in every situation. I spent a lot of time absolutely hating my mortgage. But then I decided that there was a lot that I could learn by jumping in and trying to figure out how to slay the six-figure beast. So, I really like the idea of reminding people that they can and should learn from debt!
I wouldn’t be ashamed of jumping in – money is money (or lack of money is lack of money…whatever). 🙂
If I hadn’t taken out student loans, I wouldn’t have started M$M, quit my job, learned how to grow wealth, have a college education, etc. They are obviously crappy to have, but there is a TON of advantages as well!
Having a mortgage is plenty enough debt to become an expert in my opinion. My view is that student loan debt CAN be considered good debt and mortgage debt falls in the same bucket.
I’m sure we can all agree having a lot of credit card debt IS bad, although it does happen (especially for emergency medical bills).
Sadly, we pretty much all face some type of debt in our lives so I’m 100% in agreement with your last sentence: we should learn from it since we have it.
Yes, there sure is a silver lining. I doubt that I’d be hustling as hard as I do (and loving every second of it), if it weren’t for my student loans.
Exactly!!!! I would have never figured out my personal finances if I didn’t have to take out my student loans. I would have an over-mortgaged house, sweet new car, and tons of credit card debt just like the rest of the people my age.
The best part about the benefits today is that they A) typically form into habits during our first money making years and B) we can benefit from the power of compound interest.
That’s a win-win I’ll take any day, even if it means stress and turmoil at first.
I’d like to think that I would have the same habits today if I had zero debt, but I know the truth is I would likely have much more credit card debt and a lower savings rate.
I consult with people who have six figure student loan burdens and I do find them disproportionately interested in finance since they need to apply the knowledge to get out of their predicament. Never thought about it that way that the lessons learned might be worth it
Once they are done with the loans it could come in VERY useful.
If possible, it would have been nice to not have had student loan debt, but the reality is that it is there, for many of us.
From my perspective, the folks who carry a large debt early on learn the ins and outs of managing their budget and building investments because of that deep interest you mentioned. We sure have had a tremendous amount of success because of our student loans.
“Drink all the wine and eat all the cheese” ha!
Great point – student loans can be a forcing function for getting someone interested in personal finance. But the flip side could be true, it could be a gateway to credit card debt, where someone feels they already have tons of debt so what is a little more?
That’s a great point, about becoming comfortable with debt. I definitely grabbed a few too many Starbucks in school because I knew adding a few more dollars to such a large pile wouldn’t make a real difference, right…
It is a cycle where once you are in debt, you find more creative ways to pull yourself out. Lucky for us, all the information we ever need is online and in books to help us get situated.
“I would argue the best part of student loans is that we become conditioned over time to pay a large chunk of our salary back into our net worth. Sure, this money is used to pay down our liabilities, but over time, our net worth continues to grow.”
I have to admit that I never looked at student loan liability from this angle, but you’re absolutely correct, Matt.
When I saw your headline, I expected this piece to be all about how student loans and your resulting education allowed you to earn your present salary. This was a refreshingly different take on student loans.
My girlfriend had the same respons, almost verbatim, about 18 months ago when I said the same thing. Her entire mood towards paying student loans lifted overnight and she saw those monthly payments as something positive.
I left out the obvious pro to student loans, but you’re right. Without the education from undergrad, I wouldn’t be in my position today.
I can definetely relate to all three of your points listed above, if it wasn’t for the massive interest payments I would not have started down the personal finance and ultimately FIRE path.
We are going to have a raging kegger when they are gone however.
Exactly. Learning about personal finance became fun only once it solved a problem. It might be sad that I needed something to fix, before I learned, but at least I now know more about my budget, investing, etc.
Haha – a big celebration is a must.
In addition to your excellent points, our enormous mountain of debt taught my husband and me to communicate well about tough issues early on in our marriage. We had to work together and dream together, so we grew much closer and stronger as a result.
Learning to communicate early in a relationship can never be underrated. I’m glad you brought that up.
My girlfriend and I definitely had growing pains when it came to wrapping ourselves around our student loans. I’m glad we have that behind us now! 🙂
I agree that debt is something that can help everyone learn, all of these are great points! Whether you are thinking of debt from a capital markets perspective (companies have to be good stewards of capital and conscious of keeping a solid capital structure) or thinking about debt in personal finance, the lessons to be learned are plentiful. Appreciating every dollar, developing a long-term plan, solidifying good money habits early are things that I would want a company I invest in to have, but more importantly I have to have those characteristics (and I think I do!) Great post!
From a corporate finance perspective, I agree 100%. Especially in the US today, debt financing is often less expensive while also allowing current shareholders to maintain full equity and control of their business. I hadn’t thought about that yet, but you made an excellent point.
I’m glad you labeled the personal traits as characteristics, because anyone can learn what to do and what not to do when it comes to debt. Luckily for some, we end up with so much in student loans that we’re basically forced to pull ourselves up.
Great post Matt! You make a lot of good points and definitely help put student loans in a better perspective. The part that stood out to me was, “I would argue the best part of student loans is that we become conditioned over time to pay a large chunk of our salary back into our net worth.”
That’s such a great way of looking at things, and so true! It’s better to focus on the increase in your net worth instead of focusing the amount of debt you still have left. Progress is progress. If you can avoid lifestyle inflation (which I’m sure you will), you guys will be set!
Exactly. While we do plan on having some level of lifestyle inflation – it will still be far away from 100% of all the increases we see in salary over the years.
I’m glad to have offered a new perspective! It has helped my relationship a lot, so I can see where you’re coming from.
Matt, thanks for sharing your story. It just goes to show that there truly is a bright side to every situation. If you continue the discipline and practices that you developed to address your student loan debt, you will be well on your way to FI in no time! It also shows that the right attitude is everything!